Court-Approved Amalgamation And Consistent Expense Allocation Cannot Be Grounds To Deny Section 80-IC Deduction: ITAT Delhi
Pranav B Prem
The Delhi Bench of the Income Tax Appellate Tribunal (ITAT) has upheld substantial tax relief granted to Mahle Filters Systems (India) Ltd. for the Assessment Year 2010–11, holding that a court-approved amalgamation and a consistently followed method of expense allocation cannot be disregarded by the tax department to deny deduction under Section 80-IC of the Income Tax Act, 1961. The ruling was delivered by a Bench comprising Vice President Mahavir Singh and Accountant Member Krinwant Sahay, while deciding cross-appeals filed by the assessee and the Revenue against the order of the Commissioner of Income Tax (Appeals).
The assessee, engaged in the manufacture of automotive filtration products, had claimed deduction under Section 80-IC in respect of its eligible manufacturing unit at Parwanoo, Himachal Pradesh. The dispute arose after the Assessing Officer denied the deduction by treating the amalgamation undergone by the assessee as a colourable device and by reworking the allocation of after-market trading expenses, thereby substantially reducing the profits of the eligible unit.
Before the Tribunal, the Revenue contended that the amalgamation was undertaken with the sole object of availing tax benefits under Section 80-IC and amounted to reconstruction of business prohibited under Section 80-IC(4). It was further argued that the assessee had artificially inflated the profits of the eligible unit by allocating after-market trading expenses on the basis of after-market sales instead of total sales, and that a notional mark-up on head office costs ought to have been applied.
The assessee, on the other hand, submitted that the scheme of amalgamation had been duly approved by the jurisdictional High Court and was therefore legally binding. It was contended that the Parwanoo unit continued to be owned and operated by the assessee even after the amalgamation and subsequent change of name, and that there was no reconstruction or splitting up of business. On the issue of expenses, the assessee argued that after-market trading expenses were incurred exclusively to generate after-market sales and had always been allocated on that basis, a method consistently followed and accepted by the department in earlier years.
The Tribunal rejected the Revenue’s allegation that the amalgamation was a sham or a colourable device. It noted that once a scheme of amalgamation is approved by the High Court, the tax authorities cannot question its validity or commercial rationale unless there is clear evidence of statutory violation. The Bench held that the Parwanoo manufacturing unit did not come into existence as a result of the amalgamation and continued to remain with the assessee, and therefore the bar contained in Section 80-IC(4) relating to reconstruction of business was not attracted.
On the issue of allocation of after-market trading expenses, the Tribunal accepted the assessee’s contention that such expenses were incurred solely for generating after-market sales and not for total sales. It observed that the allocation method adopted by the assessee was consistently followed over the years and had been accepted by the department in preceding assessment years. The Bench held that such a method could not be disturbed in the absence of any material change in facts or law, and that ad hoc or arbitrary reallocation by the Assessing Officer was impermissible.
Accordingly, the Tribunal set aside the disallowance made by the Assessing Officer and restored the computation of eligible profits as claimed by the assessee for the purpose of deduction under Section 80-IC.
The Tribunal also dealt with the issue of disallowance under Section 40(a)(i) in respect of reimbursements made to overseas group entities towards global insurance cover and IT-related services. Upholding the findings of the Commissioner (Appeals), the Bench held that these payments were in the nature of pure reimbursements without any income element and were not chargeable to tax in India. Consequently, it held that no tax was deductible at source under Section 195 and the disallowance under Section 40(a)(i) was unsustainable.
On the issue of royalty payments, the Revenue had argued that the expenditure incurred towards limited use of technical know-how resulted in an enduring benefit and ought to be treated as capital expenditure. Rejecting this contention, the Tribunal agreed with the Commissioner (Appeals) that the royalty payments did not result in the acquisition of any capital asset or enduring advantage and were therefore revenue in nature. The Revenue’s plea for capitalization of the royalty expenditure was accordingly rejected.
The Tribunal further held that the Assessing Officer was not justified in applying a notional 10 per cent mark-up on costs allegedly attributable to head-office marketing services. It observed that such notional estimations had no statutory backing and could not replace an accounting method consistently followed and accepted in earlier years.
In view of these findings, the Tribunal dismissed the Revenue’s appeal in its entirety and allowed the assessee’s appeal on the disputed issues. The relief granted by the Commissioner (Appeals) was thus upheld, reaffirming that approved amalgamations and consistently followed accounting practices cannot be lightly disregarded to deny profit-linked deductions under the Income Tax Act.
Appearance
Appearance for the Assessee: Sh. Neeraj Jain Adv. & Sh. Tavish Verma, Adv.
Appaerance for the revenue: Ms. Harpreet Kaur Hansra, Sr. DR.
Cause Title: DCIT Vs. Mahle Filters Systems (India) Ltd.
Case No: ITA No. 4240/Del/2016 (AY 2010-2011)
Coram: Vice President Mahavir Singh , Accountant Member Krinwant Sahay
